What About REIT Investors Amid The Brexit Saga?

REIT stands for Real Estate Investment Trust and resembles the structure of mutual funds. However, it operates and manages a portfolio of income-generating properties rather than stock or bonds. A REIT usually holds a portfolio of commercial properties like offices, shopping malls and hotels etc. that gives rise to rental income. Investors subscribing to the shares of REITs have two prime goals, one is receiving rental income in the form of dividends, and second is to get benefited from the property price appreciation.

There are two broader categories of REITs, one is equity REITs, and the second one is mortgage REITs. Equity REITs usually own large commercial properties and operate them. On the other hand, mortgage REITs own the debt provided to the properties developers and do not hold any commercial properties by themselves. They operate like a mutual fund business which owns mortgages and collect income from it.

Generally, REITs are supposed to distribute 90% of their rental income generated to the shareholders in the form of dividends along with the potential for wealth creation. In largely low-interest environments, real estate investment trusts are lucrative bets for the yield hunters.

In the United Kingdom, REITs are largely close-ended and publicly traded companies that give an opportunity for investors to enjoy tax-efficient investment exposure to property assets. The UK’s REIT regime is comparatively new against the longer established regimes in the United States and Australia; It was introduced on January 01, 2007. Amendments were brought into the primary REIT legislation, effective July 17, 2012, removing several barriers to entry and further boosting property investment in Britain.

Post amendment that took place on July 17, 2012, several big UK property businesses got converted into the status of REIT, and many newly established REITs went for the Initial Public Offer (IPO). This has boosted the UK property sector, including the newly formed sub-sectors like warehouses (logistics) and student accommodation

UK Property Prices: Outlook- KPMG

According to the results of the latest survey revealed by the audit firm KPMG, as scheduled Brexit day is approaching, the nature of withdrawal of the UK from the EU bloc will affect the trajectory of property prices in Great Britain in the medium term.  If Britain exits on October 31, with a withdrawal agreement, it is widely forecasted that property prices will settle down at a particular level in 2019 and improve by approximately 1.3% in 2020. On the other side, if a no-deal exit of the UK takes place, it could drag down property prices by in between 5.4%-7.5% across the different geographies of the United Kingdom.

Britain’s property market has been stuck in the slowdown since Brexit referendum took place in 2016, with annual property price growth narrowing to 0.9% in June 2019, against a rate of 8.2% three years before according to data received from the Land Registry. Changes made to stamp duty during 2014-2016, had also inflated the property costs for buyers of premium properties and second properties, and the fog of Brexit has put the market in reverse gear.

However, these ongoing challenges in the UK’s property market have been offering opportunities for first-time property buyers looking to step on the property ladder, primarily in the South East of United Kingdom and London. Property prices in these regions have now been declining for a period exceeding a year.

Property buyers are taking a wait and watch stance before making their purchasing decisions. Many buyers are preferring to wait for a solution to the Brexit turmoil. A potential no-deal exit of the UK from the EU bloc reflects a tough time for homeowners; a sudden departure from the European Union could have material impacts for the British economy and the property market as well.

Following a stretched period of lacklustre development in the UK’s property market, the Withdrawal deadline of October 31, 2019, is a symbolic moment, when Britain chooses to either crash out of the EU bloc with a no-deal or leave the Union with a formal  withdrawal agreement allowing for a coherent transition out of the European Union.

However, there are considerable chances that a further delay could push the Brexit date back, leading to a long period of continuing uncertainty and a lack of buyer interest. But even a delay would largely result in a similar two-outcome scenario between a deal and a no-deal.

In the wake of a no-deal Brexit kind of exit of the UK from the bloc could drag down UK housing prices by 1.1% on average during 2019 and a steeper decline of 6.2% could be witnessed in 2020.

However, its impact on the London and Northern Ireland properties could be relatively higher and worse than in the other regions, as both carry higher exposure to trade activities with the EU. It is expected that property prices in these two regions could sink by 7% to 7.5% respectively in 2020.

Meanwhile, many real estate analysts are estimating that a disorderly exit of the UK impact on Britain’s property prices could be limited because it will have minimal impact on the sector’s fundamentals driving the property market. Post a no-deal kind of exit the UK housebuilders are expected to reduce the supply of new homes in some regions during the shot-term to counter the effects of a shrinking economy. Therefore, there could be an initial fall in the property prices, but the market is expected to recoup the losses in the long run and reach a level the extent of which will depend on the new growth trajectory charted by the British economy.

Dividend Yield of REITs

Here is a list of REIT stocks, which have decent dividend yields:

Assura PLC (LSE: AGR) – Dividend Yield 3.89%, British Land Company PLC (LSE: BLND) – Dividend yield 5.37%, Civitas Social Housing Plc (LSE:CSH) – Dividend Yield 6.08%, Custodian REIT Ord (LSE: CREI)- Dividend Yield 5.63%, Hansteen Holdings PLC (LSE: HSTN)- Dividend Yield 6.33%, Newriver Reit PLC (LSE: NRR)- )- Dividend Yield 11.15%, Real Estate Investors PLC (LSE: RLE)- Dividend Yield 6.96%, Target Healthcare REIT Plc (LSE: THRL)- Dividend Yield 5.79%, RDI Reit PLC (LSE: RDI)- Dividend Yield 9.74%, Standard Life Investments Property Income Trust (LSE: SLI) -2.7% respectively.

Note: Majority of stocks are offering higher dividend yield is because of correction in price the stock has witnessed in the past couple of months.